Black swan fund makes a big bet on inflation
A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.
The firm, Universa Investments, is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller "The Black Swan," which describes the impact of extreme events on the world and financial markets.
Funds run by Universa, which is managed and owned by Taleb's long-time collaborator Mark Spitznagel, last year gained more than 100% thanks to its bearish bets. Universa now runs about $6bn (€4.2bn), up from the $300m it began with in January 2007. Earlier this year, Spitznagel closed several funds to new investors.
Unlike last year's sudden market implosion, inflation isn't an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa's bet, however, is that inflation will reach levels few expect.
By opening the inflation fund, Universa is trying to capitalise on a wave of investor demand for its products, which when they're right can protect investors from extreme market moves.
The new strategy, designed by Spitznagel, aims to post big gains if inflation and interest rates take off as they did in the 1970s. Universa will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners.
"We think these things are going to see massive volatility," Taleb said in an interview.
The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping nearing $1,000 an ounce.
The minimum investment in the firm's other funds has been $25m, though it rarely accepted investments less than $100m, a person familiar with the fund says. Similar standards will likely apply to the new fund, called the Black Swan Protection Protocol-Inflation, according to the person.
Taleb doesn't have an ownership interest in the Santa Monica, California, firm, but he has significant investments in it and helps shape its strategies.
The term "black swan," which has become a market catchphrase in the last few years, alludes to the once-widespread belief in the West that all swans are white. The notion was proven false when European explorers discovered black swans in Australia. A black-swan event, according to Taleb, is something that is extreme and highly unexpected.
For the new inflation fund, there are risks.
As investors, Spitznagel and Taleb have a mixed track record. The two managers wound down their Empirica Capital fund in 2004 after several years of lackluster returns.
Also, some investors are worried not about inflation but about deflation and its pernicious effects were the economy to remain stalled.
David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm, believes inflation won't take hold until consumer spending rebounds, which he thinks could take years. Says Mr. Rosenberg: "Not until the household sector expands its balance sheets are we likely to see the re-emergence of inflation on a sustained basis."
Taleb said any deflation would be matched by an aggressive move by governments to stimulate their economies, leading inevitably to an uncontrollable surge in prices.
-- Write to Scott Patterson at scott.patterson@wsj.com -- This article can be read at www.wsj.com
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